Cash Isa choices dwindle for savers as the average rate drops by almost a third in just a year

Cash Isa rates have dropped by almost a third in a year, according to research from Moneyfacts.co.uk, with the number of accounts available also plunging.

The comparison website reported that there were 385 accounts paying an average of 2.55 per cent in February last year, but that this has dropped to 309 paying an average 1.74 per cent - a fall in returns of 31 per cent.

The Isa season – a period in the run-up to the new tax year in April when savers act to fill their tax-free savings allowance for the year - has traditionally seen banks and building societies battle it out to top the best buy tables with higher rates.

Isa bloodbath: Rates have fallen drastically in the last year, as have the number of products available

But this year there is no sign of this happening. This is Money gave a warning shot to savers at the start of last month that they were set for a ‘subdued’ cash Isa season as the Government’s £80billion Funding for Lending scheme continues to strangle the market.

Sylvia Waycot, editor at Moneyfacts, said: ‘New Isa accounts normally hit the market with a flurry of razzmatazz in early January but we are already in February and only a few accounts have trickled quietly into the market.

‘Normally we would expect to see providers trying to grab our attention with headline rates but this year, whilst rates on some accounts have gone up, they have not generally risen by as much as they were recently reduced by.

‘It doesn’t look like it’s going to be a bonanza Isa season this year, so if you see one you like, don’t hang around as a limited market always disappears fast.’

Despite the fall in the number of accounts available, there has been an increase in providers that are allowing transfers in.

This time last year, only 22 allowed transfers in – or six per cent of cash Isa accounts available. Now, 34 do, or 11 per cent.

According to Moneyfacts, the best cash Isa rate comes from Coventry Building Society with its 60 Day notice account. This has a 2.8 per cent rate but doesn’t allow transfers in. Additionally, the rate includes a 0.6 point bonus that falls away after the first year.

The highest paying account that allows transfers in and without a notice period on withdrawals is the 2.5 per cent offering from Cheshire Building Society. The rate includes a two per cent bonus that falls away after 31 July 2014.

AT A GLANCE: CASH ISAS

Each year in April, savers are given a
fresh Isa allowance that qualifies for tax-free interest.

For 2012-13,
the limit has been set at £5,640 for cash Isas and you can deposit
anything up to this amount into a cash Isa until 5 April 2013

Cash Isas have become a popular
product since they were launched 14 years ago to develop and encourage
the savings habit through tax breaks.

Savers have piled a huge
£210billion into these accounts, with £28billion added in the past 12
months.

Those who have saved in an Isa for longer than a year were warned they could face a tough task achieving market-leading rates on all of their savings.

Sylvia Waycot said: 'If you are lucky enough to have saved in an Isa for more than one year, you might find an added complication because not all providers will allow you to move older Isas into the new one. This means that you suddenly have to keep your eye on multiple pots of money.

'Whilst an unpleasant truth, the reasons behind this are sound. The more attractive the interest rate normally means that either the size of the account or the number of accounts it can be spread over needs to be tightly controlled.

'If the Isa was to include past Isas and Tessa money, which could amount to over £60,000 the interest would need to be lower.'

In recent weeks, two providers – NS&I and Coventry – have announced they are moving existing savers onto a higher rate of interest.